The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a proposal to formally categorize investment advisers as “financial institutions” under the Bank Secrecy Act (BSA). The 216-page proposal would require both registered investment advisers (RIAs) and exempt reporting advisers (ERAs) to establish anti-money laundering (AML) programs.

Key Points of the Proposal:

  • Categorizes RIAs and ERAs as financial institutions under the BSA, closing a gap in AML regulations for the investment adviser industry.
  • Requires RIAs and ERAs to establish AML programs that include: internal policies, procedures and controls; designation of an AML compliance officer; employee training; and independent testing.
  • Obligates RIAs and ERAs to report suspicious activity to FinCEN by filing Suspicious Activity Reports (SARs).
  • Subjects investment advisers to existing BSA requirements like currency transaction reporting, information sharing and special due diligence rules.

Potential Impact:

  • Increased regulatory compliance costs for RIAs and ERAs to implement AML programs, estimated between $500 million and $1 billion annually.
  • Enhanced detection and reporting of money laundering and other financial crimes occurring through investment advisers.
  • Improved coordination between investment advisers, law enforcement and regulators to identify illicit finance risks.
  • Stronger safeguards to prevent abuse of investment advisers by money launderers, terrorist financiers and other criminals.

The proposed rule could affect over 15,000 SEC-registered advisers. FinCEN is seeking comments on this major expansion of AML rules to the investment sector. Financial firms should closely monitor these regulatory developments which may necessitate updates to their compliance programs.

This summarizes the key points of FinCEN’s proposal to formally designate investment advisers as financial institutions under the BSA. The rule aims to close an AML compliance gap but could impose significant new regulatory burdens. Financial firms should consider submitting comments during the open comment period.

To read the complete proposal, “Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers” click here.